Supply and Demand is considered a basic economic term, which defines the presence of sellers and buyers in a certain asset. In trading, the supply and demand concept is an important factor in price movement. Supply and demand trading has become significantly popular because of its simplicity and intuitive sense.
One of the most famous teachers of this trading approach is Sam Seiden. Sam started his career at the world’s biggest financial exchange, the Chicago Mercantile Exchange. This helped him to master with a very high degree of accuracy the skill of real market timing. In addition, he gained the ability to predict market turns and market movements, in advance.
He built the initial supply & demand market timing technique from this experience over 20 years ago. In all capital markets, Sam has vast experience: over 20 years of trading. He has also been a part of the Online Trading Academy where he propagates this trading style.
How do Supply and Demand work?
The basic concept is when there are more buyers than sellers, the asset price will go up. Conversely, when there are more sellers than buyers, the price will go down. When there is an equilibrium of buyers and sellers the price will be in a range.
These ideas are really simple and very powerful at the same time. They allow traders to analyze charts to define where the price is likely to go. Due to the fact that trading is all about price movement, the principle of supply and demand could be applied to forex currency pairs as well.
Supply and Demand zones are easy to identify. Basically, the S/D zone represents an extreme (Low or High) where price has significantly changed its direction. That is why it is simple for understanding even for novice traders.
Visually, a demand level is formed when the price drops to an area, then consolidates and afterward rallies, thus identifying the price zone where there is demand. This is nothing but a support area.
A supply zone is formed when price rallies and then forms a base, consolidating, and then starts to drop. This is how a resistance zone is formed.
Due to this, a specific entry price, as well as stop-loss and take-profit levels, are also simple to define. It is again a strong reason to use this strategy for novices. There is no ambiguous interpretation of the zone possible.
Figure 1. EURUSD M15 chart with Supply and Demand zones
In Figure 1, we have used the Supply Demand indicator MT4 on the EURUSD chart. The red-colored rectangles show the supply zones or so-called resistance areas. The green rectangles show the demand areas or the support areas.
You can see that the indicator plots these levels automatically. If you look at the middle of the chart, price retested the demand zone and then strongly rebounded. This is nothing but buyers overwhelming the sellers, leading to higher prices.
A similar situation happened with the upper Supply zones (marked with red color) of the chart. Price created these resistance areas and later revisited the lower zone, afterward making a solid bounce down from it.
Strength of Supply and Demand zones
The supply and demand have their own basics of weakness and strength. This gives traders some more clarity when using this trading strategy. The strongest supply or demand zone is when the price of an instrument tests the area for the first time after the level has been formed.
This can be noted with Figure 1 chart with day trading strategy applied where the price tested the green demand zone for the first time. When you observe it closely, you can see that the price just touched the level and afterward continued a rally in the desired direction.
Figure 2. USDCAD Daily chart with Supply and Demand zones
This pattern indicates a strong level of demand (and supply if it occurs at the resistance area like on the top of the Figure 1 chart).
A moderate zone is when the price retests the demand or supply area for a second time. It slightly weakens the strength of the S/D zones and thus, traders should be cautious with them. On Figure 2 chart all the zones beside one small Supply zone in the middle have been already tested thus considered average strength.
Moderate (weak) zones should be used only when you know what to do and have experience with them. People that are claiming that S/D does not work usually use all the zones and decrease their probability with their own hands. But for higher chances, only fresh supply and demand zones should be selected.
Are markets always in equilibrium?
Traders usually ask this question before they know anything about this strategy and eventually understand that the Supply and Demand principle can help to answer their question. In market terms, an equilibrium is a state when the asset is being in a price range for some time. The length of this period depends on many factors and the main reason could be the absence of ‘driving’ factors to move the instrument up or down.
But the key point of the equilibrium is that sooner or later the asset will break its price range and the longer it was – the bigger will be the breakout movement. It is not a secret that supply and demand zones do not hold forever and usually when the price goes from equilibrium, it breaks either the supply or demand zone.
The strength of the zone and the timeframe where it was located, are the key factors that define the potential power of the breakout. So it is definitely worth it not only to monitor the reversals from S&D zones but to watch after the potential breaks through the zones also.
Multitimeframe Supply and Demand zones
The supply and demand have another one strength criteria – multitimeframe. It gives trades a strong level of confidence in the area where trade could be executed.
Figure 3. EURUSD chart with Supply and Demand zones on H4 and Daily timeframes
When several Supply or Demand zones on different timeframes (for example, on H4 and Daily Supply zones on Figure 3 chart) are located near each other – it is an extra signal about the potentially higher chance for price to bounce from such area.
It is fairly difficult to monitor several timeframes on several instruments that is why a Supply and Demand Multi Timeframe Indicator is used to automatically draw zones on the desired timeframes and send alerts when the price visits couple of zones at once.
Supply and Demand indicator settings
The supply and demand indicator has a big number of settings that allow to customize it in many ways.
Figure 4. Settings of Supply and Demand Multitimeframe indicator
All the inputs of Supply and Demand Multi Timeframe indicator could be divided into several groups:
- Zone types. There are 5 zone types that may be used to display zones including zones with only wicks or zone with price action patterns like engulfing candles.
- Showing of untested zones. As mentioned earlier we should seek strong zones that have never been visited before to get a strong setup
- Multitimeframe. It is possible to select up to 3 timeframes for supply and demand zones displaying to get an overall picture of the instrument.
- Alerts. You can set up various alert types like when price visits a zones when a new zone is formed when a zone is broken by price, and some more.
- PUSH notifications. There is no need to sit in front of the monitor and wait for setups to appear. When a signal occurs the indicator will send a PUSH notification to your iOS or Android MetaTrader 4 mobile application.
- Color settings. Each zone color could be adjusted upon to the desired color scheme and without any limitations.
It is fairly difficult to monitor several timeframes on several instruments that is why an Indicator is used to automatically draw zones on the desired timeframes and send alerts when the price visits a couple of zones at once.
Buy Setup – Entries, Exits, and Stop-Loss
To simplify using the Supply and Demand indicator, here are the example of setups that could be applied.
Buy Entry: To enter a buy setup, the price must touch the closest and fresh demand area on the current timeframe and on at least one more selected timeframe (the indicator allows to have up to 4 zones). This is actually already a strong bullish indication.
Stop Loss: The stop loss should be placed a few pips below the zone on the current timeframe.
Take Profit: The take profit for the position should be the nearest supply area (red rectangle) on the current timeframe.
Trailing Stop: As soon as the price goes out from the demand zone, the stop loss should be moved to breakeven plus a few pips.
Sell Setup – Entries, Exits, and Stop-Loss
Sell Entry: To enter a sell setup, we must see that price is in the nearest fresh supply area on the current timeframe and on at least one higher timeframe.
Stop Loss: The stop loss should be just a few pips above the rectangle on the current timeframe.
Take Profit: The take profit for the opened position should be at the nearest demand zone.
Trailing Stop – As soon as the price goes away from the demand zone, the trader should trail the stop loss to breakeven plus a few pips.